I have always been a very keen supporter of British membership of the European Union, I would even support the British to adopt the Euro its not such a bad currency ! I recognize that there are pros and cons to EU membership but for me its not just about economics its also about the politics and the continued process of globalization. There are things in the EU that I don't like in particular the Common Agricultural Policy is great for farmers but a bad deal for Europe's 340 million consumers. One thing that I would dread is Brexit whereby Britain leaves the EU. There are "trade creation gains" when you join the EU due to the fact that you get rid of your tariffs against your EU trading partners and they get rid of their tariffs against you. However, there are also "trade diversion losses" due to the fact that higher cost EU partners might artificially export to you rather than cheaper cost third countries such as the United States, Japan, China or India who face a common external tariff on their exports. In theory trade creation gains may be bigger or smaller than trade diversion losses, these are the so called static gains and losses.
But we also know that there are dynamic gains from having a guaranteed long term EU market - it encourages domestic investment, it attracts Foreign Direct Investment into the partner countries from third countries wanting to jump the common external tariff wall. It enables companies to exploit economies of scale and also encourages competition by undermining the pricing power of domestic monopolies and oligopolies as well as forcing them to become more efficient to compete with EU wide competitors. These "dynamic gains" are often thought to be more important than net static gains/losses. Now today we have a report LINK1 from the IFO and Berelsmann-Stifung institute both based in Germany that confirms how costly a Brexit might be for the UK and also for the EU countries. It is hard to know the precise impact because we don't know what kind of trade deal Britain might be able to negotiate if we left the EU. As the figures below show, the dynamic losses vastly outweigh the static losses and in a worst case scenario (UK isolation) GDP in the UK could fall nearly 17% and the best case scenario (soft exit i.e. good trade deal) the losses could still total 2.63% of GDP. I know people worry about out net contributions to the EU budget and there are endless discussions about the impact of EU migration but these pale into consideration when looking at these potential costs of a Brexit. The impact on unemployment would in my view be quite devastating as well, lower incomes translate into less jobs. Still the German study at least gives some idea of the dangers of a Brexit...I just hope the message becomes more widespread.
But we also know that there are dynamic gains from having a guaranteed long term EU market - it encourages domestic investment, it attracts Foreign Direct Investment into the partner countries from third countries wanting to jump the common external tariff wall. It enables companies to exploit economies of scale and also encourages competition by undermining the pricing power of domestic monopolies and oligopolies as well as forcing them to become more efficient to compete with EU wide competitors. These "dynamic gains" are often thought to be more important than net static gains/losses. Now today we have a report LINK1 from the IFO and Berelsmann-Stifung institute both based in Germany that confirms how costly a Brexit might be for the UK and also for the EU countries. It is hard to know the precise impact because we don't know what kind of trade deal Britain might be able to negotiate if we left the EU. As the figures below show, the dynamic losses vastly outweigh the static losses and in a worst case scenario (UK isolation) GDP in the UK could fall nearly 17% and the best case scenario (soft exit i.e. good trade deal) the losses could still total 2.63% of GDP. I know people worry about out net contributions to the EU budget and there are endless discussions about the impact of EU migration but these pale into consideration when looking at these potential costs of a Brexit. The impact on unemployment would in my view be quite devastating as well, lower incomes translate into less jobs. Still the German study at least gives some idea of the dangers of a Brexit...I just hope the message becomes more widespread.
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